Sunday, December 02, 2012

"You Can't Handle The Truth"

By Ron York

Study the chart above closely. It tells a very important story about the rape of public pensions by employees and employers. Don't get it? Let me give you some more information. The jagged blue line represents the value of the Standard and Poors 500 stock portfolio. The smooth line is the evenly distributed annual rate of return. Since 1970, the S&P 500 has yield 9.95% per year (dividends reinvested). Notice how the two lines run the same track until about 1989, but then look out. The returns went through the roof until 2007, when it fell back to the trend line. It has tracked the trend line since then.

Most actuarial studies have used an assumed rate of 8% for many years, which is about 5 percentage points above inflation. This is about the normal expectation for at risk investments. Only the idiots at GASB think a rational person should be happy to recover the rate of inflation while being exposed to market risks. The use of 8% or more as the earnings and discount rates for pension plans is totally justified.

Now get your mind focused. Forget about everything else. I have a serious question for you to contemplate. What happened to the huge windfall profits from 1989 to 2007? Look at the chart again. There is a huge amount of money earned by pension plans during the those years, that is no where to be found today. First I am going to use the rubber hose and spotlight on you. Forget about your rights, you have none today. I am going to beat the truth out of you.

Okay mister employee, how much money did you contribute when your pension benefit was retroactively changed from 75% to 90%? How much money did you contribute when you talked your employer into picking up your pension contribution and then counting it as pensionable? How much money did you contribute when you talked your employer into counting the buy back of unused paid leave as part of your pension base? What did you contribute when you got your employer to give your DROP a guaranteed minimum rate of return? Where did you think the money was coming from?
Okay mister employer, let's hear your answers to the questions I just asked your employee. Forget about taking the fifth. The only fifth available here has a label on it that says "Jack Daniels". Feel free to indulge as needed. What were you thinking those years that you contributed little or nothing to the pension plan? Did you really think there would be no consequences as the result of this fiscally irresponsible behavior?

To both of you - you raped and plundered your pension plans. My advice to you? Put it back! Put all of the stolen money back! If the money had been left in the fund (no granting of unfunded benefits and failure to make contributions), every pension in this country would be way over-funded and the combined contribution (employee and employer) rates for most police and fire pension plans would be somewhere between 15% and 20% per year. The difference between the assumed return of 8% and the real return of 9.95% translates into mucho money, but Frank (employees) and Jesse (employers) James robbed the bank. Round up a posse and bring the money back.

However, there is one problem. A lot of the stolen money has gone to and will continue to go to retirees, who are beyond your reach. Forget about shaking down new hires to pay for your sins. They won't go for it. This leaves two parties stuck with the tab - current employees and the employer. Current employees are not getting out unscathed. You might as well face up to it and make the best deal you can. Mister employer - you're screwed. The big nut (unfunded liability) is one obligation you are not going to be able to avoid. Changing to 401(k)'s will do nothing to reduce this liability. In fact, it will actually make things worse for the immediate future, because you and your current employees will not be able to overcharge new employees, which you are doing now.

There is a way for everyone to get out alive, but not by shooting at each other. Accept the truth - the two of you stole the money and now you have been exposed. Want some real answers? Nah, you want to cling to your old illusions. I told you, you can't handle the truth. Was I wrong?